US Election Hampers Nippon Steel Buyout in a Potential Windfall for China

In 2023, Nippon Steel Corporation (NSC) decided to buy US Steel for approximately $14.1 billion USD (¥2 trillion JPY). NSC President Eiji Hashimoto described the essence of its global strategy as "a bid to make Japan a global headquarters."

However, the United Steelworkers (USW) union opposes the deal. USW's objection has politicized the issue ahead of the upcoming United States presidential election in November. Talks to win the union's support for the takeover are ongoing.

Successfully concluding the deal is necessary for Japan's steel industry to survive international competition. If the agreement fails, China stands to benefit.

Global Steel Production Trends and Challenges

Looking at global (crude) steel production in 2023, China was the top producer with 1,019.08 million tons. In 2023, Chinese steel production exceeded one billion tons for the fourth consecutive year. With its declining births, aging population, and shrinking domestic demand, Japanese production fell under 100 million tons for the fifth consecutive year. At 87 million tons, Japan's steel production was less than one-tenth of China's total.

Blast furnaces at major production facilities in Japan peaked at 28 in 2007 amid expanding overseas demand. At the end of 2023, the number stood at 20 due to various companies' reductions in supply capacity.

Furthermore, the gap with India also widened. India achieved a record high production for the third consecutive year with 140.2 million tons. "Unfortunately, domestic demand in Japan will not increase in the future," Hashimoto said.

Domestic Steel Production for Japan's Economic Security

Some people seem to think that Japan can simply import steel from abroad instead of worrying about domestic production. It is worth considering the risk this would entail. Imagine the increased influence of China, the largest steel producer, on Japan's supply and prices of steel.

From automobiles to appliances to homes, steel is a key material that underpins the infrastructure of our daily lives. Domestic production is essential in terms of economic security.

Technical capabilities, including quality and cost, are fundamental determinants of the manufacturing industry's overall competitiveness. Manufacturing accounts for 20% of Japan's gross domestic product (GDP).

How can Japan's steel industry stay competitive globally amidst declining domestic demand? NSC's solution involves globalizing operations to establish Japan as a global headquarters. It intends to increase revenue in the US and burgeoning overseas markets like India and Southeast Asia.

By reinvesting the profits in R&D, NSC seeks to refine Japan's unique technological prowess. The idea is to leverage this to sustain domestic production while spearheading global operations.

Overseas Expansion and M&A Strategy

However, rapidly establishing production facilities overseas for market expansion, as in the automotive and home appliance sectors, is not feasible. Each country must nurture its own steel industry, which is crucial for economic security. However, an increase in foreign production facilities could lead to market disruption due to oversupply.

Furthermore, steel consumes vast amounts of energy during production and emits large quantities of carbon dioxide (CO2), posing significant environmental constraints.

Entry into overseas markets essentially requires M&A (mergers and acquisitions) to acquire existing production bases. In addition, it is only possible with the managerial ability to overcome cross-cultural barriers.

Therefore, NSC has gradually acquired production bases in South America, India, and Thailand, accumulating experience in overseas management. Acquiring US Steel would finalize Nippon Steel's global network, positioning it as an international headquarters.

*The signboard sits in front of the building that houses Nippon Steel headquarters in Tokyo's Chiyoda district. (©Kyodo)*

US Concerns and Nippon Steel's Strategic Advantage

From the US perspective, however, it is understandable to harbor reservations. Foreign acquisitions of vital steel companies, even by allies, can raise concerns for the nation's economic security and manufacturing foundation.

However, despite a proposal from major US steel player Cleveland-Cliffs, US Steel management opted for NSC. Why?

Europe's ArcelorMittal ranks second in global steel producers. NSC ranks fourth, South Korea's POSCO seventh, and India's Tata Steel tenth. Excluding these companies, the top ten steel makers are Chinese companies led by Baowu Steel Group. US Steel has sunk to 27th. This has prompted the US government to defend the market from the influx of cheap Chinese steel with high tariffs.

Even if US steelmakers were to unite against Chinese rivals, their inability to compete would leave the defense situation unchanged. On the contrary, this could trigger antitrust scrutiny, leading to reduced production capacity and job losses.

In contrast, NSC's expertise lies in high-grade steel for cars and electromagnetic sheets for motors, giving it a competitive edge. Its robust technological prowess enables NSC to undertake offensive actions, such as filing patent infringement lawsuits against Chinese competitors. NSC's proposal exceeded Cleveland-Cliffs' ¥1 trillion (around $7 billion) offer. Additionally, NSC possesses the competitive power to contribute to the growth of US Steel and benefit shareholders. This is why it was chosen by US Steel.

US Election Impact

Washington seeks to reduce Chinese influence in the supply chain to safeguard economic security. With the emergence of competition in hydrogen-based steel production, collaboration between Japan and the US has become essential. Japan's technological prowess and the US's ample energy resources will play pivotal roles in this endeavor.

Regarding NSC's acquisition proposal, former President Donald Trump declared in January, "I would block it instantaneously. Absolutely." Many suspect Trump made this statement in a bid to win union votes.

On March 14, President Joe Biden also issued a statement on the deal. He emphasized, "It is vital for it [US Steel] to remain an American steel company that is domestically owned and operated."

Interfering in the acquisition for the sake of votes could skew the fair assessment of the deal. Such a scenario could have adverse consequences for both Japan and the US.

(Read the article in Japanese.)

Author: Noboru Ikeda, The Sankei Shimbun